Grab that German life-boat while you can, ahead of a ‘train-crash’ Brexit

The big institutional players are all convinced that 2017 will see – yet again – heightened demand for investment in real estate. This applies particularly to Germany, whose status as a safe haven has only strengthened as the number of economic imponderables elsewhere have multiplied.

Despite German yields having fallen to levels hitherto known only in major markets like London and Paris, the forces appear to be combining to send German demand and prices even higher next year. If transaction volumes aren’t keeping pace with previous record-busting years, that’s because sellers are finding less and less opportunities to move into alternative assets.  

The good stuff in Germany is becoming nigh-on impossible to buy at prices investors can reasonably justify – hence the huge latent demand for almost any worthwhile assets.

The sky’s not the limit, of course. In the residential sector, the cranes and bulldozers are working double shifts to build where they can – although even that is a long way short of what’s needed, particularly in the big cities.

It won’t stop prices rising still further, despite the best efforts of the government to wield dangerously blunt instruments such as ineffective rental caps, punitive energy efficiency regulation and discriminatory bank lending guidelines to stifle housing price inflation.

In retail, the institutional mindset means that investors are still focused on core and core-plus properties, rather than the ‘develop-to-core’ idea in the office sector that has become fashionable. Retail investors would sooner settle for a lower yield than take on the burden of much higher risk. Given the speed of change caused by the logistics and online revolutions, this is not surprising.

A recent meeting we had with CBRE’s retail team in Berlin proved most enlightening. With notable exceptions, the retail market is bobbling along on a tide of consumer prosperity, but with the shoe beginning to pinch on all sides. Stagnant rents, the demand for incentives, pressure for shorter leases, more capital expenditure and longer decision periods are now widespread, so ‘managing-to-core’ is no longer viable, bar in a small number of really top locations.

Still, despite the myriad uncertainties coursing through the ether – from Brexit to Trump, from the Italian banks to Marie Le Pen and Geert Wilders – German real estate seems to be the one thing investors can bank on, a sentiment echoed by Dr. Frank Pörschke, the head of JLL Deutschland at the property adviser’s annual pre-Christmas press briefing in Berlin.

The latest ‘Trendbarometer’ by financier Berlin Hyp showed resounding conviction (78%) among its respondents that the German office market was entering a boom phase for the next five years, as rents head upwards again after a period of near-stagnation. 84% of them also named Germany as a “much” or “somewhat more” attractive market than its European neighbours. This is flattering, but also somewhat inevitable given the nature of the woes queuing up behind the scenes.

We none of us can tell what lies ahead in the Brexit talks, nor the effect the British separation from the EU may have on real estate markets. But it is hard to see Germany being negatively affected, whatever the outcome. The longer-term outlook, in the form of the collapse of the euro - or even the only logical solution, Germany’s expulsion from the euro in the interests of saving everybody else – also offers few counter-arguments to investments in Germany property. And if even that sounds fanciful, remember that so were other scenarios a mere eighteen months ago.

More hype about Germany – or specifically Frankfurt – benefiting from the crumbs falling off London’s post-Brexit table is unhelpful, we believe. If we were inclined to bet, we’d be slipping a few bob on Amsterdam, Berlin, and maybe Paris – but we think a scenario worth pondering is the one painted by Gideon Rachman in the Financial Times.

Rachman sees neither a ‘hard’ nor a ‘soft’ Brexit looming, but rather a ‘train-crash Brexit’, in which neither the UK nor the EU can agree on the terms of a negotiated divorce. Britain simply crashes out of the EU, with chaotic consequences for trade and diplomatic relations. In his view, even if negotiations start as scheduled in March next year, unpicking a 40-year relationship over the following two years is simply impossible.

He envisages growing mutual acrimony once negotiations actually begin, leading to the irretrievable breakdown of talks. Arbitration talks in the Hague will then follow, the respective fronts will harden, and as a result, “Brexit would then happen after two years in the most abrupt and damaging fashion possible: with Britain’s membership of the EU simply lapsing.” The ensuing carnage will cause mayhem and could be the trigger for all manner of unforeseen consequences.

Yes, Rachman’s view sounds credible to us. As even most Germans will admit, the British have a long history of out-negotiating their European counterparts. To counter this, the official European opening gambit, of billing the UK at least €60bn for incurred liabilities before the real talking has even begun, is an indication of how Brussels is taking the gloves off now to show the UK how unyielding it is finally prepared to be. With the Daily Mail and its cohorts screaming at Theresa May and her team about the ludicrousness of Brussels’s demands, meltdown could occur rapidly.

Still, on a cheerier note, it’s Christmas. We wish all our readers a peaceful and relaxing holiday, and despite the undoubted maelstrom that lies ahead, a prosperous 2017.